Fed chief Ben Bernanke warns he can't save US economy from recession if Congress lets it topple off 'fiscal cliff'

US central bank boss Ben Bernanke has delivered a tough message to politicians about the 'fiscal cliff': solve it, because if not the Fed can't prevent a recession.

Bernanke warned the US economy was already being affected by the prospect of $600bn of spending cuts and tax rises, which will automatically come into force on January 1 if a new plan is not thrashed out between President Barack Obama and Congress.

'The ability of the Fed to offset headwinds is not infinite,' he said. 'In the worst-case scenario where the economy goes off the broad fiscal cliff ... I don't think the Fed has the tools to offset that.'

Ben Bernanke: 'The ability of the Fed to offset headwinds is not infinite'

The influential chief of the Federal Reserve repeated an earlier warning that the full impact of the fiscal cliff would mean recession.

The cuts and tax hikes, if they come into force, would deliver a ‘fiscal shock of that size which would send the economy toppling back into recession,’ he told the Economic Club of New York.

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Bernanke added: ‘Congress and the administration will need to protect the economy from the full brunt of the severe fiscal tightening.’

But he also dangled the prospect of a stronger economy before Congress as an incentive for politicians to strike a deal.

'I do think there is important potential for the economy to strengthen significantly if there is a greater level of security and comfort about where we are going as a country,' he said.

Bernanke said worries about the budget negotiations were causing uncertainty and already damaging growth.

'Such uncertainties will only be increased by discord and delay,' he said. 'In contrast, cooperation and creativity to deliver fiscal clarity - in particular, a plan for resolving the nation's long-term budgetary issues without harming the recovery - could help make the new year a very good one for the American economy.'

The Dow Jones fell in reaction to the speech, but later recovered to end yesterday's session down 7.5 points at 12,788.5. European markets got off to an uncertain start today due to worries about Greece's debts, but were trading flat by mid-morning.

Veteran City commentator David Buik of Cantor Index said: 'Ben Bernanke, the Fed chairman, in the wake of encouraging comments made by the President about progress being made to deal with the fiscal cliff in Congress, spelt out the ramifications of failing to deliver a solution for cutting the US’s humungous debt mountain.

'It was a vertical fall in to the vortex of recession! He did not mince his words, though my summary may have been blunter than he might have thought prudent.'

Gary Jenkins of Swordfish Research said: 'Mr Bernanke was in carrot and stick mode, first shooting a warning shot across the politicians bows by stating that the Fed doesn’t have the tools to offset the potential harm to the economy if they fail to resolve the fiscal cliff issue but saying that if they do deal with the cliff then the new year could be "...a very good one for the American economy".'

Cameron Peacock, market analyst at IG, said: 'US equities initially weakened after Ben Bernanke, addressing the New York Economic Club, said that the Fed probably lacked the tools to offset the full impact of the fiscal cliff should policy makers fail to reach a deal.

'While this was initially greeted with selling, the market pared its losses to finish largely unchanged on his follow-up comments that a longer-term solution to dealing with the deficit would actually remove one of the major impediments to US growth.'